CREJ

Page 10 — Office & Industrial Quarterly — June 2021 www.crej.com OFFICE — CONSTRUCTION A s vaccination rates climb and business restrictions loosen across Colorado, many businesses on the Front Range are eager to get their workforces back to the office after more than a year of remote work. With most companies plan- ning a return to the office in some form by fall, the tenant improve- ment market is quickly gaining momentum. The TI process always has been an important tool as it allows for the customization of a space to meet a company’s specific needs and impacts everything from pro- ductivity to company culture. Now, with the potential need for health and safety upgrades like improved air filtration or increased social dis- tancing, improving an office space is a crucial step for companies to move forward. However, a set of market condi- tions, created in part by the pan- demic and in part by the historic run-up in development we expe- rienced on the Front Range before 2020, have made executing a tenant improvement plan more complex – and more expensive – than many businesses anticipate. For companies ready to lease new space, expand or sublet, there are a few key efforts that can help miti- gate the impacts of the market right now – and it starts with timing. n Move quickly. Timing is key in real estate, even under more normal circumstances, but with price increases in materials and commodities driv- ing up the cost of building at a breathtaking pace, the role of tim- ing in the office TI process is more impactful today than ever. The price of lum- ber, in particular, has more than tripled in some cases over the past year as sawmills across the country slowed production in 2020 – both as a result of pandemic shutdowns and in anticipation of a slowdown in demand (similar to what they experienced in 2008), which never materialized. As a result, the over- all average price of lumber jumped to $1,188 per thousand board feet at the end of April, up from $349 a year prior. Materials like steel, cop- per and electrical wire have like- wise jumped in price between 80% and 400% in less than 18 months. Unfortunately, we anticipate mate- rial availability will continue to be a challenge in the construction mar- ket for the foreseeable future. Increases like this can be hard to stomach, and uncertainty about the future of the office market still abounds, making some companies understandably cautious. But prices are escalating at such a pace right now that hesitation of as little as a week can have dramatic impacts on schedule and overall project cost. n Negotiate a healthy tenant improvement budget. The good news is that you may not have to bear the increased construction costs alone. While lease rates are showing signs of stabilizing following the pan- demic, landlords still were facing a marketwide vacancy rate of 16.8% (in downtown Denver it jumped to 19.7%) in the first quarter, the high- est it had been since 2010. Vacancy is expected to continue to rise as new product comes on line this year. All of this means that tenants are significantly better positioned than they were just a couple of years ago to negotiate a healthy TI allowance, with contingency to accommodate rising costs. Working with an experienced broker, tenants should assess their situation, read their leases and determine their best-case scenario, in terms of concessions – whether that’s timing, flexibility or support on costs such as moving and tenant improvement – then make requests knowing they’re in a position of strength. n Bring everyone to the table from the start. Once you’ve secured a space, involving a general contrac- tor early in the design phase will help with identifying potential budget and schedule impacts. If your landlord is not providing a general contractor, make sure you Timing is everything in office construction right now Nick Groeger Principal, Taurus Builders Prices are escalating at such a pace that hesitation of as little as a week can have dra- matic impacts on schedule and overall project cost. Pictured above is a tenant improve- ment project for Kentwood City Properties’ office. Please see Groeger, Page 16

RkJQdWJsaXNoZXIy MzEwNTM=